The present invention is directed to a system and method for more accurately determining and providing market terms for conducting business transactions which results in benchmarks. The present invention proposes a transparent transaction based and rules based system for arriving at interbank interest rates that may be applicable for large, intermediate and small sized banks. The present invention thus addresses a business challenge that is particular to the banking industry, in that it is able to apply computer processing in a new and useful way to fine tune and more accurately determine in real time an optimum and actual and verifiable benchmark such as an interest rate that banks can use in conducting loans or other transactions based on the analysis of actual transactions.
The London Interbank Offered Rate, or LIBOR, was created to provide an interest rate based on an average of daily estimates from participating banks. LIBOR is now used for derivatives contracts, as well as many credit cards, corporate loans and mortgages around the world. The average interest rate is estimated by leading banks in London that they would be charged for if borrowing from other banks. LIBOR, today, is the primary benchmark for short term interest rates around the world for banks of all sizes, but it has been criticized because it is based on estimates rather than on actual transactions.
The inter-bank lending market for midsized banks is set for transformational changes. These changes are triggered by shifts in regulatory environment, need for interest rate benchmarks and alternate interbank-funding opportunities for the banking industry. While these issues are true for the banking industry in general, the midsized banking sector, comprised of banks with assets ranging between $150 Billion to $1 Billion, will be particularly affected.
The Inter-bank funding market is fractured with multiple actors, interest rates and products. Interbank funds transactions are done through federal agencies, brokers and between banks involving different rates and tenures. At present, there does not exist a single organized market for interbank funding's causing higher transaction costs and market inefficiencies. In addition, the existing interbank market has not performed particularly well during times of financial crisis. During the financial crisis issues including uncertainty on counterparty credit worthiness, information asymmetry or potential lender's doubts on their own ability to borrow in the future causing severe constraints in interbank funding market. The daily average interbank lending volume has been declining since the 2008 financial crisis to about ˜$114 billion at present from $145 billion in 1998. From a regulatory standpoint, there also exists uncertainty with regard to bank reporting requirements and funding levels that may impact adversely the interbank lending market. It is anticipated as the economy emerges from the unique interest rate regime and Federal Reserve measures in place currently, an organized market for interbank lending will be critical.
While the current global benchmark for interbank offers is LIBOR, many midsize American banks do not necessarily benchmark their assets through LIBOR alone. Other benchmarks include FHLB, Eurodollar, repurchase agreements and other such measures. These multiple rates are priced based on varying standards, sources and credit criteria. This suggests lack of true price discovery in the interbank market that is relevant for the Midsized banking sector.
Furthermore, a single global benchmark may not provide the best asset/liability management for midsized bank risk managers. This is especially true when interest rates normalize as the interbank offer rates that are relevant for larger banks will not be for the midsized banking sector. The inefficiencies with the current estimation of LIBOR, the global benchmark for interbank offer rate are well documented. LIBOR is an estimated rate and not a market determined rate. Further from a risk management standpoint, the uncertainty associated with the Libor estimates causes inefficiency and higher costs.
Accordingly, taking action to create a well-functioning and liquid market for interbank funds is needed as it makes good business sense for midsized banks because it should reduce the costs for doing business. Thus, it is desirable to solve some of the problems associated with calculating LIBOR rates, interest rates, commodity rates (e.g., gold or silver), foreign exchange rates and other market indexes or other market based rates based on market estimates.